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Quant Style Slump That Strategists Foretold Finally Arrives

(Bloomberg) -- If you’ve been cursing at technology stocks for the past two days, there’s another corner of the market that’s perhaps just as deserving of your anger.

It’s called momentum -- quant jargon for stocks that have performed the best over the past year or so -- and it’s gone through a rare bout of pain this week.

The lagging performance didn’t come out of thin air. Strategists from Morgan Stanley to Lazard Asset Management Ltd. have recently stoked worries about the popular quantitative strategy. Their primary concern? That investors piling into the same winners, including lofty technology stocks, had heightened the risk of a rush to the exits.

Those warnings, it seems, were scarily prescient. A long-short momentum portfolio, which hedges out greater market movements, had logged its biggest two-day plunge since November 2016 at yesterday’s close, according to data compiled by Bloomberg.

And the concerns have yet to abate.

“If we have momentum selling off further, if we have cyclicals selling off further, then also tech will suffer further,” Max Kettner, a Commerzbank AG cross-asset strategist, said during an interview with Bloomberg TV. “I’m getting slightly scared with regards to tech right now.”

Though company-specific news from Twitter Inc. to Nvidia Corp. may have been the catalyst for the sell-off, a plunge in the quant trade highlights the tremors being sent through all of the market leaders. In the momentum portfolio, it’s not just technology companies that contributed to the Tuesday losses. The biggest drag after Twitter was drugmaker AbbVie Inc.

Momentum had been seemingly impervious to equity weakness. Even with the two days of selling, the factor is in the green so far this year. However, that strong performance set up momentum stocks to be among the biggest losers as soon as things turned sour, according Steven DeSanctis, an equity strategist at Jefferies LLC.

“The momentum trade performed well even in the recent downturn, and thus it was destined to get hit,” DeSanctis said. “Style performance and tech ETF flows were all at extremes.”

Still, much like in prior pullbacks, DeSanctis added, the stocks are likely to rebound before long.